2024-11-08 15:36:00
AAt a time when the former executive is being interviewed by the Senate to understand the reasons for the plunge in the deficit in 2024, Laurent Bach, professor of finance at Essec and co-head of the business division of the Institute of Public Policies (IPP), comes bring grist to the debate mill. As a reminder, the deficit, which was initially forecast at 4.4% in the 2024 finance law, should ultimately reach 6.1%, according to the latest government data. This slippage is largely explained by revenues lower than forecasts by Bercy services. A hole of around 40 billion euros.
In a post published this Friday, November 8, Laurent Bach examines the main culprit: corporate tax. While this tax on taxes represents less than 5% of revenue, it nevertheless constitutes more than a third of the forecast error in 2024. The author also emphasizes that this poor forecast of the IS is far from being an exception. It is also thanks to an error on the IS (but in the other direction) that France benefited from a budgetary “jackpot” in 1999. Other countries were also confronted with errors in forecasting this tax.
According to Laurent Bach, a large part of the forecast error can be explained by a poor estimate of the base (i.e. profits). But 40% of this also comes from the IS payment mechanism (a system of installments, which the company can modulate) and a change in company behavior. “Companies, particularly rich in liquidity at the end of the pandemic, were then able to pay generous deposits, only to return to cash management of the IS less favorable to the State. This accordion effect of IS revenues, already observed in 2009-2010, is therefore being reproduced at the moment,” writes the economist.
Cash effect
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This is not the only lesson that Laurent Bach draws by analyzing the data. It also demonstrates that, against all expectations, IS forecast errors are often accompanied by estimation errors for other revenues. According to him, this would not be due to poor forecasts of economic activity, but also to cash flow effects of companies, also having an impact on the payment of VAT or social security contributions.
The economist concludes by drawing two lessons from this analysis. First, “to avoid the accordion effect of revenues paid by companies, tax collection must be stricter when the firms’ cash flow can be assumed to be sufficiently strong. The law is already moving in this direction, with an IS for large companies and another, with more flexible payment conditions, for SMEs. However, this targeting is not discussed or evaluated enough in public debate. If it is relevant, why not extend it to other compulsory deductions paid by companies? » He also advises improving the sources of information making it possible to predict IS, by strengthening the reporting obligations of large companies.
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**Interview with Laurent Bach, Professor of Finance at Essec and Co-Head of the Business Division at the Institute of Public Policies**
**Interviewer:** Thank you for joining us, Professor Bach. In your recent article, you highlighted significant errors in corporate tax revenue forecasts, contributing to the expected rise in the deficit for 2024. Can you elaborate on the key reasons behind these discrepancies?
**Laurent Bach:** Absolutely, and thank you for having me. One of the primary reasons for the forecast error in corporate tax revenue, or IS as we refer to it, stems from inaccuracies in estimating the profit base. Additionally, around 40% of the discrepancies can be attributed to the IS payment mechanism. This system allows companies to modulate their payments, which means their cash flows can fluctuate significantly.
**Interviewer:** That’s quite interesting. You mentioned an “accordion effect” with IS revenues. Could you explain what that means and how it impacts state revenues?
**Laurent Bach:** Certainly. After the pandemic, many companies found themselves with substantial liquidity. This led to them making larger upfront payments towards their IS. However, as economic conditions changed, they shifted to more conservative cash management strategies, which negatively affected their subsequent IS payments. We’ve seen this pattern before in the years following prior economic downturns, such as in 2009-2010. This accordion effect means that after an influx of revenue, the subsequent periods can experience significant downturns, complicating fiscal predictions.
**Interviewer:** In light of these dynamics, what implications do you believe this has for policymakers trying to create stable revenue forecasts?
**Laurent Bach:** Policymakers need to incorporate more flexibility into their forecasting models and consider the behavioral responses of companies to tax systems. Understanding how different firms respond to tax incentives and the liquidity they hold post-crisis can help improve accuracy. It’s crucial to recognize that corporate behavior isn’t static and can evolve in reaction to economic conditions, therefore call for comprehensive analyses and perhaps even reforms in how we approach corporate taxation.
**Interviewer:** Thank you, Professor Bach. It seems like a delicate balance for both companies and for the state. Your insights are invaluable as we navigate these challenges.
**Laurent Bach:** Thank you for having me. It’s an important conversation, and I hope we can continue to engage on these issues moving forward.
